Capital Allowances claim on Plant and Machinery
Capital allowance is one of the most misunderstood areas of business taxation in the UK. As a result, many businesses don’t claim back what they are entitled to, leaving a considerable amount of tax relief on the table.
What is Capital Allowance?
In the UK tax system, a capital allowance can be claimed against taxable profit. This allowance can be claimed for a range of assets that fall under plant and machinery categories. This can be anything from computer equipment, structural office renovations, and research.
Depending on the type of asset, the capital allowance can be claimed over several years. Sole Traders, Partnerships and Companies can all submit capital allowances claim on plant and machinery.
What Is Classed As Allowable?
You can obtain a full list of allowable assets that can be subject to a capital allowance claim which falls under the plant and machinery category. These include:
- Company vehicles (cars, vans and trucks)
- Research and development (R&D)
- Patent registration
- Office/warehouse renovations
HMRC’s rules on what qualifies for plant and machinery capital allowances are strict, so you need to document everything carefully. You have to be sure that what you are claiming for performs ‘qualifying activity’ for your business.
Depending on your type of business, qualifying items may differ. IT equipment, office desks and other furniture all qualify. Any machinery necessary to carry out business activity will qualify too.
What cannot be claimed as a Capital Allowance?
Items that cannot be claimed as part of your capital allowance includes:
- Buildings (including doors, window, land or other structured)
- Items used in business entertainment
- Any item which is leased
Measuring Capital Expenditure on Plant & Machinery
When it comes to your capital expenditures on plant and machinery, there are three pools. These are known as the main or general, special rate and single asset pools. Each time you spend money on plant and machinery, you should filter it into one of these three so you know what you can potentially write off.
Most plant and machinery purchases will go into the general pool. The special rate pool is for items that are important to your business premises such as lighting, aircon and heating.
The single asset is actually divided into two sub-pools. The single asset pool is used for purchases such as company vehicles. The other half of this pool is known as the short life asset pool. Assets with a short life span, which need to be replaced often, will fall into this category.
Annual Investment Allowance (AIA)
This allowance lets businesses deduct the entire value of something that is solely used for the business. There is a limit of £1 million on this allowance. The tax deduction should be claimed in the same year that the item was purchased.
The AIA can be used on most plant and machinery purchases excluding vehicles and business gifts.
One of the most tax-efficient ways of utilising capital allowances claims on plant and machinery is to use the first-year allowance. This means that you can get a deduction of 100% of the price of the asset against that year’s profits.
In order to maximise this allowance, you should consult a professional accountant as the rules around this allowance change frequently.
Writing Down Allowances (WDAs)
This type of capital allowance claim allows you to claim tax relief over several years. The WDA is calculated on the initial cost and value of the assets over the period.
Assets within the main asset pool can usually be claimed at 18%. Items in the special rate pool can be claimed at 8%. Single asset pool items can be 8% or 18%, but this is dependent on the particular item.
Consulting a Tax Professional
When completing your tax returns, you should work with a tax professional to ensure that you are claiming all of the tax relief and allowances that you are entitled to. They can also help you to get your tax returns in order and compile any supporting information that may be needed.
They’ll be able to help you submit your capital allowances claim on plant and machinery for your business.
Capital allowances can be complex but are well worth pursuing as they can be worth a lot of money to businesses. Depending on the type of purchase, the allowance can be claimed in full, during the first year, or across several years.
You should keep thorough records of your purchases and their usage case. So that if you are audited or asked to explain your capital allowance claims, you can provide supporting documentation.